Economic Experiences Influence Investment Behavior

In their study, Stefan Nagel, Associate Professor of Finance, Stanford Graduate School of Business, and Ulrike Malmendier, from the University of California, Berkeley, found individuals who had experienced high stock market returns throughout their lives were less risk-averse, more likely to participate in the stock market, and more inclined to invest a higher percentage of their wealth in stock. In contrast, the researchers found those who experienced high inflation throughout their lives were less likely to invest assets in bonds, preferring inflation-proof cash-like investments, according to the Stanford Graduate School of Business News.

The study indicates that the more recent an economic experience, the more impact it had on investor behavior overall, and young people tended to be more affected by recent events than older people. For example, the low returns in the 1970s made younger investors more risk-averse through the 1980s, as they pulled their money out of the stock market at higher rates than older investors, who still had memories of better returns in the 1950s and 1960s, giving them confidence that the market would rebound.